Foreign Trade Zones

One aspect of U.S. trade that gets little attention is Foreign-Trade Zones (FTZs), areas in which businesses and manufacturers enjoy reduced tariffs (import duties), tax breaks and a host of other advantages. Licensed by the U.S. Commerce Department’s Foreign-Trade Zones Board and supervised by U.S. Customs and Border Protection, FTZs are restricted-access sites in or near ports of entry.

Current figures show 164 active U.S. FTZ projects, 18 of them in New York and New Jersey. The combined value of shipments into FTZs totaled $692.6 billion in 2008, a 127 percent increase over 2007.

Small and large companies alike can enjoy significant duty advantages by being located in a Foreign-Trade Zones, allowing them to be more competitive in the global marketplace. These include:Duty exemption on re-exports. Normally, when a manufacturer or processor imports a component or raw material into the United States, it must pay the import tax, or duty at the time the component or raw material enters the country. However, because a Foreign-Trade Zone is considered to be outside the commerce of the United States and the U.S. Customs territory, no customs duty is owed on foreign merchandise brought into the zone until the merchandise leaves the zone and enters the commerce of the United States. Only then is the merchandise considered imported and the duty is paid. If the imported merchandise is exported back out of the country, no customs duty is ever due.

Duty deferral. Since FTZs are outside the customs territory of the United States and goods are not imported until they leave the zone, customs duty is deferred until merchandise is imported from a zone into the United States. Instead of having substantial monies tied up in customs duties on their inventory, companies have use of that money for other purposes.

Duty elimination on waste, scrap and yield loss. Let’s say a chemical plant manufacturing hydroxywidgitpropolyne, which carries a 15 percent duty rate, uses the raw material oxyovertaxophene, which also carries a 15 percent duty rate, for one of its raw materials. Part of the production process consists of bringing the imported oxyovertaxophene to extreme temperatures.

During this process, 30 percent of the oxyovertaxophene is lost as heat. If a processing company not in the FTZ program imports $10,000,000 per year of oxyovertaxophene, it will pay $1,500,000 in duty as the raw material enters the United States. If the same company uses the FTZ program, it does not pay duty on the oxyovertaxophene until it leaves the zone and is imported into the United States. The FTZ user brings the oxyovertaxophene into the zone with no duty owed.

It then processes the oxyovertaxophene into hydroxywidgitpropolyne. Remember, during this process 30 percent of the raw material is lost due to waste factors, so the $10,000,000 in oxyovertaxophene is now worth only $7,000,000. Assuming all of the end product is sold into the United States, the 15 percent customs duty totals only $1,050,000, a savings of $450,000.

Locating a business in a Foreign-Trade Zone is one way of cutting operating costs. In addition to duty benefits, FTZs may offer such services as warehousing, order fulfillment, shipping / receiving, customs and secretarial services — all at lower costs than outside the zone. Businesses may assemble products in the zone, or simply establish a mailing address as its formal presence in the marketplace.

According to the National Association of Foreign-Trade Zones, a nonprofit organization, communities also benefit when companies increase their cash flow, save taxes and improve their bottom line by locating their operations in a FTZ. “Economic growth and development are stimulated because jobs are retained and created in the community. The FTZ program impacts indirect employment, as well, because a business location not only creates jobs specific to itself, but also creates opportunities for suppliers and service providers in the community,” the group says.